:: The potential and limits of resource-rich East India

Dilemma of resources and resistance

Imm Jeong-Seong Senior Business Analyst of POSCO Research Institute

est Bengal is located at the lower Ganges-Yamuna River. The Mahanadi River, which literally means the Great River, starts in Chhattisgarh and flows through W the states of Orissa and Jharkhand. These areas have the largest mineral reserves in India, but are usually ranked last in competitiveness. This is the region of East India. Why are the East Indian states so underprivileged? Can their situation be improved?

○● “Resource curse” East India is comprised of the coastal areas along the Bay of Bengal and the tropical inland jungles. Due to easy access, the coastal areas have been modernized quickly. Kolkata has a particularly favorable geographical location; the East India Company chose Kolkata for a British trade settlement. However, 30% of the total area of East India is mountainous, and the

061 Autumn 2011�POSRI Chindia Quarterly populations of native tribes are relatively high: 34% in Chhattisgarh, 28% in Jharkhand, and 22% in Orissa. In some remote districts, this figure is as high as 60-70%. These native tribes are isolated from modernization as well as recent economic development, and are classified as the poorest group in India. Naxalite guerillas are rampant in these mountain regions. They are most active along the meridian from the Himalayas in Nepal to Andhra Pradesh. This area is called “The Red Corridor”. The Naxalites formed in 1967 in Naxalbari, a small village in West Bengal where poor, landless farmers revolted against their rich landlords and seized the land. The Naxalite movement can be traced back to British colonial years, when the British changed the traditional agricultural system to a European-style landownership system. This new system led to the rise of rich landowners with commercial backgrounds, and farmers and handicraftsmen collapsed, becoming even poorer. Not only poor farmers, but also marginalized tribes, support the Naxalites, Maoist rebels that pursue a Maoist revolution. Since the Naxalites moved into mountain regions, out of reach of government authority, more and more tribesmen have participated in and supported the movement. The Naxalites are opposing forestry and industrial development out of fear that they will lose their stronghold and tribesmen will be estranged from the movement.

○● Economic development depends on political stability In India, the “land of politics”, the economy and industrial development in states depend on politics. West Bengal, the representative state of East India, opened a new chapter in history when the Communist Party won a democratic election in 1977 for the first time ever in the world. Amidst backlash from farmers, the Communist Party of India (Marxist), or the CPI(M), were able to take power after promising land reforms to farmers. The CPI(M) succeeded in land reforms, but it ended up driving large companies, domestic and foreign, out of the state, and the economy in West

062 POSRI Chindia Quarterly�Autumn 2011 :: The potential and limits of resource-rich East India

Bengal further deteriorated. It was under these circumstances that Buddhadeb Bhattacharya was elected as the Chief Minister (CM) of West Bengal in 2000. He was committed to reviving the economy through economic reforms. For instance, he introduced business-friendly policies in his state. However, the two investment deals that Mr. Bhattacharya concluded after offering significant incentives to attract companies to West Bengal eventually dragged him down. The government of West Bengal acquired land from farmers to allow Salim Group of Indonesia to build a massive chemical complex, and leased part of the land to Tata Motors for a Nano car plant. Farmers resisted on the grounds that they had not been properly compensated for their fertile land. On the frontline of this resistance was the Trinamul Congress (TC), a local political party led by Ms. Mamata Banerjee. This coercive commercialization had already been judged by the public in the 2009 Lok Sabha (House of People) election, and the TC won a landslide victory in the West Bengal assembly election held in May of 2011. After India gained independence in 1947, the state of Orissa was under

Economic profile of East Indian states

West Bengal Orissa Jharkhand Chhattisgarh India Total

35,397 15,095 8,308 10,785 - GDP (INR 100 Mil.) (2008) (2009) (2009) (2009)

Real economic growth rate 7.3% 10.2% 5.4% 9.7% 8.5% (Yearly average 2005-2009)

595 490 395 540 1,265 GDP per capita ($) (2009) (2010) (2009) (2010) (2010)

Source: Businessworld, May 9, 2011, VMW Analytic Services, etc.

063 Autumn 2011�POSRI Chindia Quarterly the control of the Indian National Congress (INC). However, since 1967, some local political parties have occasionally taken power. Biju Patnaik, an independence fighter and close friend of former Prime Minister Jawaharlal Nehru, quit the INC and was sworn in as CM under Janata Dal (United), or JD(U), serving from 1990 to 1995. Upon the death of Biju Patnaik, his son Naveen Patnaik became a politician, established Biju Janata Dal (BJD), and took power in 2000. In fact, Naveen Patnaik had left Orissa when he was young and was active as an artist in the USA, but he was persuaded to join politics by a group of politicians who wished to retake power. He tried to enact anti-corruption policies and develop the economy under his pro-poor and honest image, but his political leadership was limited. Naveen Patnaik’s government was a coalition government of the BJD and the BJP (Bharatiya Janata Party), and he was not the actual authority in the ruling party. As the conflict between Naveen Patnaik and the politicians who led him into politics mounted, he was unable to carry out his policies to improve Orissa. After the founding of Jharkhand in 2000, the state had unstable politics due to frequently changing ruling parties, and it was even under presidential rule in 2010. Shibu Soren of the JMM, a local political party, and Arjun Munda of the BJP have been sworn in as Jharkhand’s CM alternately under a power-sharing deal. They are both from tribes and have to represent the interests of their tribes. For this reason, they are passive in the development of mountain areas. Unlike the three East Indian states explained above, the state of Chhattisgarh has long been controlled by the BJP, except for the three years of INC control right after the creation of the state. Raman Singh has long been working as Chief Minister of the state. Dr. Raman Singh, who holds a degree in Ayurvedic Medicine, has been given the name “Mr. Clean” for his leadership in the eradication of corruption. He banned Naxalite organizations in Chhattisgarh in 2005, and is trying to weaken the Naxalite movement under a move supported by the opposition party.

064 POSRI Chindia Quarterly�Autumn 2011 :: The potential and limits of resource-rich East India

Under his leadership, Chhattisgarh stood The chronic problems in East India first in the country in cannot be solved overnight, but there are the implementation of signs of change. the 20-point program for the development of Scheduled Tribes and Scheduled Castes. The United Nations has given its highest award to Chhattisgarh in recognition of its human development model. CM Raman Singh is regarded as a good model by other states for his ability to maintain the excellent financial status of his state. Each East Indian state’s political situation is well reflected in its economic growth. From 2005 to 2009, the Compound Annual Growth Rate (CAGR) of GDP in India was 8.5%, while Orissa and Chhattisgarh recorded 10.2% and 9.7%, respectively, slightly higher than the national average. West Bengal and Jharkhand recorded 7.3% and 5.4%, respectively. The GDP per capita rates in these four states are significantly lower than the national average of USD 1,265. This figure is only USD 395 in Jharkhand.

○● The wind of change The chronic problems in East India cannot be solved overnight, but there are signs of change. First, the reforms adopted by Nitish Kumar, who was sworn in as Bihar’s CM in 2005, are gaining ground. These reforms will have an impact on other states, which will compete to not fall behind Bihar, once India’s poorest state. Moreover, people in other East Indian states are likely to change their minds as they witness improvements in Bihar, and demand reforms in politics, which are marred by corruption and incompetence. Because the Communist administration in West Bengal collapsed after 34 years of rule, neighboring states will learn the lesson that they should lay out policies for farmers and tribes. Mamata Banerjee, who was recently

065 Autumn 2011�POSRI Chindia Quarterly sworn in as Chief Minister of West Bengal, has pledged to woo labor- intensive industries to stimulate the poor local economy. West Bengal’s change in industrial policies is highly likely to affect neighboring states with a high percentage of unskilled workers. If West Bengal promotes the heavy chemical industry and the resource development industry in addition to labor-intensive industries, the state is likely to face weaker resistance. The Indian National Congress cares the most about the issues of the most underprivileged class. The government of India has been carrying out extensive programs to build rural infrastructure under the Bharat Nirman Project. Since 2006, it has also offered 100 days of guaranteed employment to all unskilled rural workers and achieved profound results. The central government declared Naxalism to be the most serious internal threat to India’s national security, and has cracked down on the Naxalites, in association with state governments. For this reason, resistance against the development of forest areas is likely to weaken over time. The development of the four East Indian states is a prerequisite for the expansion of power generation and steel production capacity necessary for India to continuously achieve the goal of 8% annual economic growth. Therefore, if power and steel supply shortages worsen, the government of India will have no choice but to pay more attention to and put more effort into East India, and improve thorny relations with state governments for better cooperation. In that process, the government of India might find solutions to many issues, such as the relocation of tribes, the environment, land acquisition, and allocation of mineral rights. The 2010 Commonwealth Games mascot was not an elephant, but a Royal Bengal tiger. If chronic political and social issues are addressed, and clean and powerful leadership is exercised, East India will advance as swiftly as a Bengal tiger.

066 POSRI Chindia Quarterly�Autumn 2011 :: The potential and limits of resource-rich East India

Can East India become the next Mecca of the steel industry?

Lee Dae-Woo Head of POSCO Research Institute, Delhi Office

uring British rule, Tata Group founder Jamsetji Tata keenly felt that India should develop heavy industry to become rich. He made up his mind to build a steelworks. He searched all D over the jungle for the most appropriate site. After years of searching, he decided that Jamshedpur in Jharkhand State was the best place. In 1912, Asia’s first steelworks was built there. East India is favorably located for blast furnace steelworks that melt iron ore and coal to make molten iron. Since independence from Britain, the government of India has established steelworks one by one in Orissa, Chhattisgarh, West Bengal, and Jharkhand. As a result, these four states collectively accounted for almost half of the entire steel production of India as of 2009, showing that East India is a hub for the Indian steel industry. With India continuously maintaining an economic growth rate of about 8%, demand for steel, which is essential for construction, infrastructure, and

067 Autumn 2011�POSRI Chindia Quarterly manufacturing, is growing by more than 10% each year. It is no exaggeration that the future of the Indian economy is dependent on East India’s ability to increase production of steel, the “rice of industry.” Harvard Business School Professor Michael Porter`s Diamond Model includes four attributes: factor conditions; demand conditions; related and supporting industries; firm strategy, structure, and rivalry. This article analyzes the competitive advantage of the steel industry in East India based on Porter’s Diamond Model.

○● Factor conditions: an abundance of iron ore When it comes to factor conditions in the steel industry, East India has rich iron ore and mineral reserves: 80% of the country’s reserves of hematite, 80% of its coal, 95% of its chromite, and 92% of its nickel. The eastern states have ample manganese ore reserves, too. Based on national mineral production, India ranks fourth in the world in production of iron ore, third in coal, second in chromite, and sixth in manganese ore. These high rankings give an idea of just how rich East India’s mineral reserves are. East India’s iron ore reserves are concentrated in Orissa, Chhattisgarh, and

Competitive ranking of Indian states (Unit: ranking; scores)

Related and Firm strategy, Factor Demand Overall supporting structure, and conditions conditions industries rivalry

West Bengal 20 54.37 17 54.68 17 54.48 17 58.15 28 49.93 Orissa 15 54.98 21 53.97 25 53.63 12 58.72 14 54.68 Jharkhand 21 54.22 13 56.37 10 55.39 26 50.69 21 52.52 Chhattisgarh 12 57.57 14 55.59 13 54.74 6 61.52 10 60.63

Note: 1) 29 states surveyed (28 states + Delhi); 2) #1 Goa, #2 Delhi, #3 Maharashtra, #4 Gujarat, #5 Himachal Pradesh Source: Businessworld, May 9, 2011

068 POSRI Chindia Quarterly�Autumn 2011 :: The potential and limits of resource-rich East India

Jharkhand, but not West Bengal. Much East India has all of the factor of these reserves is conditions for development of the hematite, which is steel industry, but it has limited suitable for steel executive ability. production and has a high iron content of 62-66%. East India has highly favorable conditions for steel production compared to South Indian states such as Karnataka, whose reserves have a high percentage of magnetite with an iron content of only 35-45%. India has approximately 267.2 billion tons of coal reserves, but only 33.4 billion tons are coking coal reserves for steel production, accounting for only 12.5% of coal reserves. Most Indian steelmakers are dependent on coking coal imports, because most of the reserves are low-grade coal with high ash content. To make matters worse, the international coking coal price, which was USD 55/ton in 2004, has recently exceeded USD 300/ton. Under these circumstances, India is seeking ways to utilize coking coal buried in the country. The major coal belts in India are located in Orissa (24% of total reserves), Jharkhand (29%), Chhattisgarh (16%), West Bengal (11%), Andhra Pradesh, Madhya Pradesh, and Maharashtra. Coking coal is mostly found in Jharkhand.

○● Demand conditions: weak steel-consuming industries Among the many steel-consuming industries, the construction and infrastructure sectors account for more than 50% of steel consumption, while the secondary steel industry and the manufacturing industry, including automotive, shipbuilding, consumer electronics, and machinery sectors, constitute the rest. Manufacturing companies are mostly located in the western, northern, and southern parts of India. Based on statistics on automotive production capacity in 2009, North India, with companies like

069 Autumn 2011�POSRI Chindia Quarterly Maruti Suzuki and Honda, has the highest production capacity with 1.1 million units, followed by West India (GM, Tata, and Mahandra) with 1.08 million units, South India (Hyundai, Ford, and Toyota) with 760,000 units, and East India with only 24,000 units. North India is home to the consumer electronics companies such as LG, Samsung, Whirlpool, and Hitachi, as well as Indian companies including Videocon, Voltas, and Godrej. West India has LG, Whirlpool, and Siemens, and some Indian companies. In South India, there is Samsung, Whirlpool, Sony Ericsson, and Nokia. On the other hand, there is just one Indian consumer electronics company in East India. Shipyards are primarily located in West and South India, and machinery companies are mainly distributed throughout North and South India. Steel demand in East India totaled 14.45 million tons, accounting for only 24.1% of the national demand. If high-end steel production increases and the investment environment improves, many more manufacturing companies will build plants in East India.

○● Related and supporting industries: urgent need for freight railway construction Logistics costs account for a huge proportion of the expenditures of the steel industry. However, East India does not have a competitive edge in logistics infrastructure, including roads, railways, power, and ports, compared to other regions. In terms of roads, the government-built Golden Quadrilateral highway network has favorably affected the states that it services: Orissa (440㎞), West Bengal (406㎞), and Jharkhand (192㎞). West Bengal also benefits from the East West Corridor National Highway. As for railways, it is more important to build freight railways that connect mines and steelworks than to build new passenger railways. The site in Orissa where POSCO is planning to build a new steelworks is 290㎞

070 POSRI Chindia Quarterly�Autumn 2011 :: The potential and limits of resource-rich East India

Steel MOU’s concluded after 2005

West East India Orissa Jharkhand Chhattisgarh India Total Bengal Total

No. of MOU’s 12 49 65 74 200 222

Production 21 75.7 104.2 56.6 257.5 275.7 capacity (1mt)

Source: India’s Ministry of Steel, 2009-2010 Annual Report

away from the mines. The government of India plans to build new railways for industrial development and to construct a new Dedicated Freight Corridor (DFC) connecting four major cities; West Bengal, Orissa, and Jharkhand are likely to benefit from these plans. There are currently only three major ports in India. However, the deep- water shore of East India provides favorable conditions for the shipping of steel materials and products. In addition, East India is relatively close to Southeast Asia, a major net importer of steel.

○● Rivalry: intensifying competition among steel companies The five steelworks of the state-owned Steel Authority of India Limited (SAIL), India’s largest steel company, are all located in four eastern states. Tata Steel’s steelworks is in Jharkhand. Existing steelworks are expanding their production capacity, and there is a spate of new plans to build or extend steelworks in East India. Since 2005, a whopping two hundred steel MOU’s have been concluded, and the combined production capacity of these proposals would reach 257.5 million tons, more than 90% of India’s total production capacity. This shows that investment in steel is concentrated in East India. In 2005, POSCO announced a plan to build an integrated steelworks in

071 Autumn 2011�POSRI Chindia Quarterly Orissa with a production capacity of 12 million tons. The world’s largest steel company, ArcelorMittal, also revealed a plan to build steelworks in Jharkhand and Orissa, each with a production capacity of 10 million tons. Tata Steel is setting up a 6 million tonnes per annum (MTPA) integrated steel plant in Orissa, in addition to an expansion project which will increase its existing steelwork’s capacity to 10 million tons. Tata has also signed MOU’s to build two steel plants in Jharkhand and Chhattisgarh. State- owned iron ore miner National Mineral Development Corporation (NMDC) is building a steel plant in Chhattisgarh with a capacity of 3 million tons, while Bhushan Steel and Jindal Steel and Power Ltd. (JSPL) are constructing steel plants in Orissa. Because projects for building large integrated steelworks were hindered by backlash from residents, JSW and Bhushan Steel are planning to construct steel plants in West Bengal, where there are no iron ore reserves. These companies decided to give up captive mines to more easily secure steel plant sites. Many of these projects have not been realized, but competition among steel companies in East India will surely become fiercer than ever.

○● Discordance between central and state government policies After Michael Porter suggested the Diamond Model, he added government support and policy factors to make up for shortcomings in the Model, which did not apply to the actual cases of Japan and Korea. These factors seem to play an important role in determining whether East India can realize its growth potential. Government support and policies bolstering the industry are necessary to get the most value from steel. In reality, however, state governments’ lack of administrative ability has led to failure in land acquisition, stalling large-scale projects proposed by POSCO and ArcelorMittal for 5-6 years. The government of India has delayed granting environmental approval on the grounds of protecting the

072 POSRI Chindia Quarterly�Autumn 2011 :: The potential and limits of resource-rich East India

tribes living in mountain areas. These tribes represent a high proportion of the total population: 34% in Chhattisgarh, 29% in Jharkhand, and 22.1% in Orissa. Despite rampant activities by Maoist rebels called Naxalites in mountain areas of East India, there has been no effectual crackdown on Naxalites by the central government. Some people point out that there is little cooperation between East Indian state governments and the central government, because the political parties in control of East India are different from those in the central government (Indian National Congress). In conclusion, East India has all of the factor conditions for development of the steel industry, but it has limited executive ability. Therefore, unless central and state governments take innovative measures, the two hundred MOU’s are very likely to be cancelled. It is expected that steel production will be far short of demand, and net imports will exceed 10 million tons. It seems that production capacity will likely increase only after all stakeholders reach consensus. However, it is expected that reaching such a consensus will take at least five years.

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